Previously, we prepared an overview of the broader effects of the war in Ukraine, sanctions on Russia, and Russian responding policies on the financial markets. As promised, we’re now sharing an insight into how those emerging influences have affected the usual processes in Mintos when it comes to Russia-related parts of our business. Later, we take a look into three basic scenarios for possible repayments prospects for the Russia-issued loans.
Normal market conditions
Normal market conditions are a product of periods of market stability, and they’re signified by a steady and constant flow of investment activity. Disruptions in individual or global markets result in abnormal market conditions which often can cause disruption in the availability of money on the platform.
The first bigger disruption that caused a disturbance in the market conditions was the pandemic at the beginning of 2020, characterized by prolonged impacts on the money flows, loan repayment ability, and liquidity of the lending companies. While we saw signs of recovery over the course of the past year, in a few instances localized market disruptions affected investments on Mintos once again in the past few months, particularly the recent social unrest in Kazakhstan, when we witnessed disconnection from the internet and temporary pause of bank transfers, with things getting back to normal quickly after. In February 2022, with the Russian attack on Ukraine, the following war and set of sanctions on Russia had a strong impact, disturbing the transaction flows between these two markets and Mintos.
Normal payment flows from Russia to Mintos
In normal market conditions, payment flows related to loans issued to borrowers in Russia looked like this:
1. Borrowers make payments for their loans in RUB
RUB is the currency of the local market. Although a larger part of investments is made in EUR, loans are issued to borrowers and repaid by borrowers in local currency in the case of the Russian lending companies.
2. The lending companies exchange borrowers’ payments from RUB to EUR (for EUR investments)
Also, lending companies are covering the currency pair fluctuations, including potential currency exchange losses.
3. Lending companies make repayment transfers in EUR to Mintos (for EUR investments)
Mintos first receives proof of payment. The payment transfers are serviced via SWIFT systems, reaching Mintos and investors in 1 to 2 days if there are no specific changes that might trigger reactions from the local currency control mechanism, which are characteristic to doing business with Russia.
4. Mintos receives and distributes funds among investors
After receiving payments, money is distributed to the Mintos investor accounts within the same day.
Changes in market conditions
For 5 years, there were no major problems in repayment flows from the lending companies from Russia, and the above-described processes were functioning smoothly. We had taken into account the heightened risk of sanctions on the Russian market early on. Also, from the start, Mintos decided to not work with Russian lending companies that issue loans to businesses dealing with state-owned entities.
As the threats of the war in Ukraine became a reality, we disabled investments in loans from Russian and Ukrainian markets on the Mintos Primary Market, and stopped listing new loans from these markets overall.
Major external factors that influenced disruption in the above-described flow are as follows:
- Sanctions on Russia and on the country’s selected biggest banks, which are either direct banks of the lending companies on Mintos, or indirectly related to the lending companies as correspondent banks
- Depreciation of RUB over the past few weeks, and very high currency volatility that put a halt on defining the real RUB value
- Inability and unwillingness of the European banks to service RUB due to various risks
- Russian retaliation policies, of which the most impactful was a ban on repayments of Russian businesses’ debt to external partners in foreign currency
The effects of war-related changes on the payment flows from Russia to Mintos
We will now take a look at how each of the mentioned parts of the repayment process was disrupted and what it looks like in the current state of abnormal market conditions.
1. Borrowers make payments for their loans in RUB
Reality: Repayment ability in specific borrower segments might be weakened by the rising inflation and growing unemployment rate.
Seven big Russian banks were disconnected from the SWIFT payment system. This means an obstacle to international business-doing for many Russian companies and their foreign partners. Since the SWIFT cut-off, Russia has focused on its own payment system, so internally, there are no obstacles to borrowers making payments in RUB.
Although payments in RUB within Russia are enabled, going forward, the rising inflation and unemployment rate in Russia will have a growing impact on the health of the lending companies’ loan portfolios and debt collection management. Besides sanctions on Russia and retaliation policies by Russia, borrowers are also allowed credit holidays. These were primarily introduced for borrowers whose income was reduced by up to 30% due to sanctions, and borrowers are allowed to take grace periods for 6 months, in the period until September 2022. The introduction of macroprudential limits for unsecured consumer loans is set until 1 January 2023. In conclusion, although there are no obstacles to borrowers’ RUB payments, there might be an impact on borrowers’ creditworthiness in Russia.
2. The lending companies exchange borrowers’ payments from RUB to EUR (for EUR investments)
Reality: There are significant limitations for lending companies when it comes to exchanging RUB to EUR within Russia. Uncertainty about the value of the ruble together with rising costs for shortfalls can put additional pressure on the lending companies.
Until the beginning of the war, there were no issues with lending companies exchanging RUB for EUR to make payments to investors on Mintos. Since February 2022, the exchange has been significantly impacted due to a number of various factors, such as large commission rates for such exchanges (12% at the moment), or limits to how much can actually be converted. The prohibition to make EUR payments, or limitations on how EUR can be accessed add additional weight to issues with the currency exchange.
Large currency fluctuations are also having an impact on the shortfalls risks such as the ability to cover EUR liabilities from RUB denominated loans, which now significantly increased for the Russian lending companies. With the RUB value depreciated, the gap for the currency exchange is growing, and to close this gap might be a challenge for the lending companies going forward. Not to breach regulatory capital requirements of the lending companies due to unfavorable EUR to RUB exchange rate, the Central Bank of Russia has allowed lending companies to use the exchange rate set on 18 February 2022 for accounting the EUR-based liabilities in rubles. This is possible until 31 October 2022. As of 1 April 2022, the EUR to RUB exchange rate has rebounded close to the pre-war level. At the moment, the currency risk has decreased from the level when RUB depreciation was around 30% over the past weeks.
It’s not certain how the value of RUB will develop further. However, with the significant limitations imposed on any currency exchange in Russia, the ability to use foreign currency in payments and significant transaction fees for such exchanges, the publicly available exchange rates need to be taken with reservation. Exchange rates shown on a daily basis might be significantly different from real rates at which transactions could actually happen in the open market.
It’s important to mention that 1/7 of investors’ exposure in Russia is in RUB, and this part will not be affected by the described currency exchange issues.
3. Lending companies make repayment transfers in EUR and RUB to Mintos
Reality: Lending companies can’t make repayment transfers to Mintos in euros, and payments in rubles are limited.
Some of the lending companies from Russia that offered loans for investments on Mintos are impacted by their servicer banks being sanctioned and banned from SWIFT. As a result, they didn’t manage to transfer any payments in RUB since the beginning of the Russian attack on Ukraine. More about other cases in point 4.
In March, Russia issued a decree to introduce a special procedure for debt repayment by the Russian state bodies and Russian debtors to non-Russian creditors from countries that made “unfriendly actions towards Russia”, which includes all countries from the European Union. EUR repayments from Russia to foreign companies are currently not possible. Even repayments in RUB are capped at a maximum amount of RUB 10 million (approximately €85 000) per month. The exchange rates and specifics for such transactions are subject to individual agreements with the Russian companies and are characterized by many unknowns.
In the period from 24 February when the war started, a total of RUB 4.7 million in payments was transferred to Mintos from lending companies from Russia which have alternative servicer banks that are not subject to sanctions. This is only a smaller portion of amounts that are currently pending.
4. Mintos receiving and distributing funds among investors
Reality: EUR investments are only partially repaid in RUB, and RUB servicing is at disposal of servicer banks.
As described before, repayments in euros from Russian to foreign companies are currently forbidden. Receiving payments in RUB from the lending companies is primarily impacted by the bank that the lending company uses. Some lending companies who had accounts with the smaller servicer banks or non-sanctioned banks have managed to transfer some funds to Mintos, but exclusively in RUB.
All of the lending companies that are affected by SWIFT-related sanctions for their banks are now working to set up bank accounts in the banks which are not sanctioned. This would help lending companies to continue transferring borrowers’ repayments to business stakeholders outside of Russia, including Mintos and investors. Opening a business bank account, a process slow even in normal market conditions, is now even slower due to the current situation in Russia. It is further complicated for lending companies in Russia with HQs based outside of the country, as they’re subjects of additional controls by the local regulators in Russia.
On the other hand, banks in the EU are not eager to hold funds in RUB. In fact, most of them are looking to eliminate their RUB positions, some due to anticipated costs, some due to fear of breaching sanctions. This is why in a few instances investors’ amounts available in RUB were exchanged to EUR based solely on the banks’ decisions and at a currency exchange rate set by the bank for that day. These amounts were transferred to investors without any additional fees. This was not a decision of Mintos, as we’re not a bank and can’t hold investors’ funds – by law, we are required to hold investors’ funds with servicer banks. In addition, the Mintos servicer bank’s correspondent bank is also still not allowing currency exchange for KZT.
Even when a lending company is able to make a transfer in RUB, it’s not guaranteed we will instantly receive the payment in our servicer bank, or be able to initiate the currency exchange right away. This is because the servicer banks are not willing to take on the currency risks, given the current political climate and ad-hoc decisions by the Russian government. Even when they do accept RUB, these funds can be accessed only when the bank decides to exchange them to EUR, based on their own evaluation and decision. In general, this is still a way to provide access to available funds for investors, within the reality of existing limitations.
Similar practices, including a total halt on any RUB-related transactions, are observed in banks across Europe.
Scenarios about repayment prospects going forward
With what we know so far, we can’t make predictions or calculate with certainty the future developments of the war, the span of sanctions going forward, or Russian retaliation measures in the time that follows. Still, based on common reason, we can identify three high-level, general, and non-binding resolutions of the current situation with the war in Ukraine and its effects on the financial markets. With such an approach, we could recognize some of the assumptions about the possible impacts on the exposure of investors on Mintos in Russia-issued loans, and determine some of the responses. We are sharing them with investors to broaden the light on the uncertainty and the range of possible outcomes.
a.) Optimistic scenario
The war in Ukraine ends soon, with resulting changes in the Russian socio-political environment. This happens before sanctions exhaust lending companies’ liquidity resources and borrowers’ ability to repay their loans. Sanctions are starting to be lifted, and lending companies manage to set up and implement functional and result-yielding processes and repayment schedules. Investors on Mintos are paid partial dues as soon as transaction channels open, and the rest of the dues are paid over time. The remaining amounts would be subject to individual repayment schedules, depending on each lending company’s prospects.
Optimistic recovery range: all or most of the exposure recovered in the medium to long term. A possible negative impact would come from the effects of the slowly recovering inflation and certain losses that occurred due to force majeure: human and economic losses and migrations.
b.) Pessimistic scenario
The war in Ukraine prolongs with changing intensity over time. Regardless of the war outcomes, Russia is under long-lasting and persistent sanctions, and there is an increasing division between the West and Russia. Russia becomes fully isolated, resembling countries like North Korea or Iran. Businesses and borrowers are financially exhausted due to foreign investments and companies leaving the country, with millions of jobs lost, and inflation pushing people to (the edge of) poverty. Credit holidays in Russia are prolonged, and debts to foreign companies are nationalized.
Pessimistic recovery range: long-term significant losses and weak chances of any recovery, except for the loans from Mikro Kapital, the entity that has a group guarantee that covers for losses from exposure to loans issued in Russia. Partial recoveries would be possible in the case that the pessimistic assumption scenario eventually turns upwards and takes over some assumptions from the realistic/optimistic scenarios.
c.) Realistic scenario
A wide gap remains between Russia and Western societies over the next few years. This does not preclude that the diplomatic relationships between Ukraine and Russia, and Russia and the western world slightly improve over time, with negotiations bringing partial stability to the region, a break for the involved parties, and somewhat positive changes in the dynamics of the economic and financial markets. Over the upcoming year(s), some sanctions are partially lifted. In some cases, business communication between Russia and foreign markets is re-established, and for the sake of money exchange for goods such as natural resources, financial transactions are made somewhat easier over time. Borrowers’ and lending companies’ ability is strongly impacted by high inflation in Russia and a lasting cut-off, to a certain extent, from the international business currents. Though businesses struggle to make repayments, some possibilities to do so exist.
Realistic recovery range: limited to substantial recovery in the long-term, depending on the effects of the sanctions and internal policies in Russia on the lending companies, and the ability of the lending companies to maintain liquidity and solvency. Settlements for Mintos and investors are restructured, and depending on the abilities of individual companies, recoveries are delivered to Mintos and investors over the course of time. Even during this phase, while some companies manage to bend the portfolio curve up, some lending companies are not managing to overcome the impacts of the war and sanctions-related effects.
Please, keep in mind that there are multiple storylines about how the current situation with the war in Ukraine and sanctions for Russia might develop in the near and far future. Don’t take the shared scenario assumptions as investment advice, or factual information that you should base your risk assessment on.
We will keep informing you about any major developments that can impact the future state of your investments in loans issued in Russia.
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